We all are going to die. It’s a fact. Even after knowing this fact, we humans are very optimistic about life. That’s our superpower.
But shouldn’t we also be a little smart about it? When you know you may die anytime while your family is still dependent on your income, why don’t you buy life insurance? Let’s talk about why you need it and how to select the best plan for you.
Estimated read time: 4 minutes and 56 seconds
Buckle up, here we go!
Why life insurance?
In life, family is the most important to us. We earn money to provide them with food, shelter, education, etc. Let’s say you became a parent recently. Now you start thinking about your child’s education and other expenses.
You plan to invest an amount every month so that your child doesn’t face any problems. But this investment plan assumes that you will be able to invest a certain amount every month for the next 15 to 18 years, right?
Can you be 100% sure that you will be able to invest the amount every month for so many years? What if you are suddenly diagnosed with some critical illness? Or what if you or your spouse pass away?
Isn’t it going to be a nightmare for your child and family? Think about it.
What if your child or family are looking for an insurance policy but finds none? They realise that you didn’t secure their future.
So, yeah. Don’t wait. You need to get life insurance in place before you even start investing.
Which life insurance plan is best?
There are multiple life insurance plans available in the market. Some plans return the premiums paid after the maturity if you live. Some invest premiums in the stock market and share the returns with you.
But among all those plans, term insurance is the best. Term insurance pays your dependents a corpus amount if you pass away during the policy period. This plan doesn’t return any premium back. Why is this the best? We did some maths to find out.
Our calculations showed that insurance and investments shouldn’t be combined. Term insurance gives you better coverage at low premiums. Other money-back plans charge you an extra premium for the same coverage amount.
If you buy the term plan and invest the difference amount directly. You will earn better returns than what the other insurance plans offer.
You can check the calculation here. Remember, numbers never lie.
So, term insurance. That’s it. Remember the word.
People/agents will come to you with children’s plans, ULIPs, and pension plans. Don’t listen to them. Just buy a term plan. This simple type of insurance will protect you for cheap.
Why should you buy insurance asap?
Insurance companies calculate the premium to charge you based on your age, lifestyle, health conditions, income, etc.
When you are young and are not diagnosed with any disease, mathematically, the probability of your death is low. So they charge less premium from you.
Once you enter your 30s, 40s, and 50s, your mortality rate increases. The probability of you getting diagnosed with a disease increases. So they will charge you a high premium for the same life cover.
So buy a term insurance plan as soon as possible. Don’t wait till you get married, have a child or anything else.
Ideal policy duration
With term insurance, you keep paying your premiums until you die or till the policy expires. It’s on you to decide how long you want to keep your policy.
Usually, you should be insured until the age of 55 to 65. After that, you won’t have any dependents. You will have a retirement fund for yourself if you invested in it. And your kids will be earning too.
The premium keeps increasing as you increase the age until which you want to be insured. So plan accordingly.
Ideal policy cover amount
You should get a cover up to 10x of your yearly expense plus the sum of all liabilities you have (education, home, auto, credit card, etc.)
But insurance companies provide you with insurance cover based on your income. So a standard rule of thumb is that you take a minimum of 10x your annual income. So, if you earn ₹10 lakhs a year, you need to have a life insurance cover of at least ₹1 cr.
Remember to take inflation into account too. So if you can afford it, you can take insurance cover up to 15x or 20x of your annual income.
Can your insurance cover be increased?
Once purchased, you cannot change your term insurance policy amount or duration.
When you buy insurance at a young age, your income or expenses might be low. So after some years with raised income and expenses, you might feel the insurance cover is inadequate.
To avoid this, you can choose term insurance with an increasing cover option. In this plan, the cover increases by a fixed percentage every year until it is 2x the starting base cover. Premiums are fixed lifelong. Some insurance companies, like MAX and Bajaj Allianz, offer increasing cover options.
Remember, this increasing cover option is different from life stage riders. Yes, there are some riders available with insurance plans. Let’s discuss this.
Important life insurance riders to consider
Insurance companies offer some riders that you can use to enhance your term plan. It’s an add-on or power-up.
Here are a few riders you should consider:
1. Life Stage Benefit
If you buy a policy when you’re young, your cover might be inadequate in the future after marriage and kids. With life-stage benefits, you can opt to increase the insurance cover when you get married or have kids, and premiums also increase.
2. Waiver of Premiums
Imagine if you become seriously injured and you lose your job. You won’t be able to pay insurance premiums.
In such scenarios, some insurers allow you to opt for a waiver. So for a small fee, you get to keep the policy and don’t have to worry about the premiums if you get disabled.
3. Critical Illness Rider
Every day, an increasing number of people are diagnosed with critical illnesses like cancer or chronic lung disease. In such situations, you are at risk of losing your job, and your family will lose your income.
However, if you opt for the critical illness rider, the insurer will pay out a portion of your term cover in cash to help you.
Remember that most policies will pay out the corpus from your sum insured. And your term cover will reduce by an equal amount.
Also, sometimes these riders could be expensive and make sense for few. So do a careful analysis before adding the riders. You can also buy critical illness insurance separately.
Keep your family informed
After all this hard work, you should inform your family about every insurance policy you hold.
Who to contact in case of emergencies or help with an insurance claim? How to proceed with a life insurance claim? Everything.
What is the point of buying all the policies if they don’t know about them? Also, we found some free/inbuilt insurance policies. Check here.
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